The Panic of 1819

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This is a direct quote from my AP Us History textbook regarding the panic of 1819:

"Dubious banking policies helped bring on the Panic of 1819 (just as they caused the financial crisis of 2008). But the most important cause was an abrupt 30 percent drop in world agricultural prices after the Napoleonic Wars. In Charleston, South Carolina, in 1818, the price for a pound of raw cotton fell from 34 cents to 15 cents. As their income plummeted, planters and farmers could not pay their debts to their suppliers and banks. Many state banks went bust; those that were still solvent in 1821 had just $45 million in circulation. The panic gave Americans their first taste of a business cycle, the periodic expansion and contraction of output and jobs inherent to an unregulated market economy."

Now I haven't read Rothbard's book on The Panic of 1819, but can anyone give me a brief summary of what this quote gets right and what it gets wrong?

I cant delve into it too much but from what i remember Rothbard's thesis was that the Panic of 1819 was direct fallout from the inflationary policies that were used to finance the War of 1812. If i were in your AP history class i might ask the teacher to help me investigate the trajectory of cotton prices from before the war until 1819, and to help explain why they got so high in the first place. I would emulate the textbook and use as an analogy the crash of 2008, asking why it was that housing prices got as high as they did in the first place, and if it was really a lack of regulation that led to these states of affairs.

It has been stated that a pledge was given to restore metallic money six months after the signature and ratification of a definitive treaty of peace, and the bullionists clamoured for the literal execution of the contract. It is here to be observed that this pledge or promise was disregarded at the peace of Amiens, so that constructively it was abandoned; nor was it ultimately carried in the terms of the statute, since it did not take effect till 1819, and even then the Bank was exonerated from a full payment of all its notes in coin till the 1st of May, 1823, though the directors of their own accord anticipated that date, and paid in sovereigns on the 1st of May, 1821. It may be well here to remark that the words, “The Bank Restriction Act,” are used properly as a compendious term for that whole system of measures and acts of parliament, commencing with 1793, and ending with 1814, by which the value of money was lowered; as the words, “Mr. Peel’s Bill,” are used as a compendious term for those other measures, commencing in 1814, by which the value of money was unjustly raised.

On the 2nd May, 1815, the market price of gold in London was quoted at £5 6s. per ounce; but after the battle of Waterloo, the exchange against England rapidly declined, and a bill being passed to continue the restriction of cash payments until the 5th July, 1816, the Bank obtained time to reduce the mercantile value of gold in relation to its own notes; and in January, 1816, gold was brought down to £4 2s. per ounce. In the prices of all other commodities there was a proportionate fall. These reductions were effected by government acting on the circulating medium which was at its highest in 1814, but was reduced to nearly one half in 1816. The consequence was a scene of agricultural and mercantile distress of unprecedented severity. In 1815, the total number of bankruptcies was 1,285; in 1816 they increased to 2,089, being an addition of 55 per cent. in one year. In reference to this period, Sir James Graham asserted, and, as he declared, on the authority of the most competent judges, that the losses sustained by individuals at that period “counterbalanced all the profits of all the bankers during the war.” The government became alarmed, and the restriction of cash payments was further extended from July, 1816, to July, 1818. The bankruptcies which, in 1817, had been 1,575, were reduced to 1,056 in 1818, being a decrease of 33 per cent. The national distress began to disappear; in fact, remunerating prices and prosperity were restored, but distress again returned, when it was ascertained that gold was again rapidly leaving the country. Before the close of the session of 1818, the Chancellor of the Exchequer announced to parliament that it was not advisable for the Bank to resume cash payments in July, 1818, as had been intended, and the Restriction Act was extended to the 5th July, 1819. It is here desirable to fill up the outline of this short but memorable period.

On the 22nd June, 1816, an act was passed to provide for a new silver coinage, and to regulate the currency of the gold and silver coin of the realm. Its first clause repealed the 18th Charles 2, c. 5, which permitted any person, native or foreign, to take plate, silver bullion, or foreign coin to the mint, to be there coined into the current money of the realm of England without charge. It then directed that the pound troy of standard silver, eleven ounces, two dwts. fine, which had hitherto been coined into sixty-two shillings, should henceforward be coined into sixty-six shillings. Clause 11. enacted that in future gold coin should be the only legal tender in payment of debts, exceeding forty shillings. It was falsely pretended that this act and the act of 1819, presently to be noticed, restored the ancient standard; and this palpable untruth has been repeated over and over again in the various pamphlets of Lord Overstone, and the speeches of the second Sir Robert Peel; and no extent of charity can permit us to assign any other reason for so gross a violation of veracity than the deliberate purpose of wilful deception. The ancient standard to which those gentlemen referred was the standard of Elizabeth, A.D., 1601, which allowed the debtor to discharge his obligations, according to his pleasure, either in gold or silver; whereas the act of 1816 restricted him practically to gold, silver being lowered to the character of a subordinate counter, and restricted as a legal tender to forty shillings.

It has been stated that prices rose in 1815 to the war level, and that rise has been referred to an expansion of legal tender of seven millions over and beyond the amount of circulation prior to the autumn of 1817. It was shewn before the Agricultural Committee of 1821 that, in 1818, wheat was 84s. 1d. per quarter. As compared, not with the consumption of the war, but with the consumption of 1818, taking the large towns of Liverpool, Manchester, Birmingham, Sheffield and Leeds, not only bread, but meat, fell in 1819, 1820, and 1821, that is, after gold payments were ordered to be resumed. The fall in meat in those towns was proved before the committee to have been 15 per cent.; and proved by the most decisive evidence, the diminution of hides being 15 per cent. If anyone superficially considers that a fall of 15 per cent. was a proof of cheapness, let him bear in mind that the supply of animal food had declined to the same scale of per centage; and let him further take notice that a petition from Birmingham to Parliament in 1821, stated that less butchers’ meat was consumed as butchers’ meat fell, showing such a decline of wages simultaneously with the decline of food, as deprived the working classes of that command over commodities which they had enjoyed in 1818, when the supply of the legal tender was ample. The year 1818 was not only a prosperous year for agriculture, but a prosperous year for commerce and shipping. In reply to questions asked by the Committee on Foreign Trade, which sat in 1820, Mr. Tindall, an eminent ship builder, said, that in 1818, the value of ships had recovered from depression; and that there was enough employment for all ships, including the transports discharged after the war, at good freights. Mr. Tooke stated, “in 1818, I had very great difficulty indeed in getting the requisite quantity of shipping.” But, in 1819 and 1820, that is after Peel’s Bill was passed, ships were again too numerous for commerce; then Mr. Tooke said, “he could have procured double the quantity of tonnage he desired.” Mr. Marryatt, a member of the House of Commons, and a most extensive West India merchant, averred in a speech delivered by him in Parliament in 1820, that a vessel called “The Sesostris,” which cost in 1818, £12,175, was sold in 1820 for £6,300. If this case stood alone, it would be insignificant in support of the present argument; but Mr. Marryatt declared that the rule was universal, of which he cited numerous instances. In fact, during 1818, commerce, manufactures and agriculture all flourished.

The bullionists, being in possession of Downing Street, were obstinately bent on resuming cash payments, though, as we have seen, they had been compelled to postpone the measure from time to time. They urged the Bank to commence an issue of sovereigns to keep up appearances, and prepare the public for the change; and the Bank did issue some in October, 1817. At this very juncture, the French government commenced a series of monetary operations, the object of which was to provide itself with gold. They had borrowed a loan from English capitalists, and as the price of our sovereigns had been fixed, by the act of 1816, at £3 17s 10½d an ounce, though the market price of gold in December, 1817, was declared to be £4 0s. 6d., the French agents, of course, took away our cheap gold; the consequence was, that by the end of 1817, the Bank was drained of £1,240,422, which it had been laboriously collecting and converting into coin. This process went on, and by the end of 1818, the Bank had parted with the enormous sum of £6,756,000. Thus were we punished for our folly in fixing the price of gold, and thereby selling it for less than the market price. The preceding account of this drain rests on the authority of Mr. Alexander Baring, whose house contracted for the loan.

Immediately on the passing of the Bill, prices began to fall. Those persons were fortunate who obtained £75 for what had previously sold for £100. Profits and wages rapidly and extensively declined. Riots broke out in the manufacturing towns. The Luddites attributed their sufferings to machinery, and destroyed it when they were able. Large meetings were held, demanding parliamentary reform as the proper cure for the evils endured. To aggravate the pressure, and add fuel to the flames of discontent, three millions of fresh taxation were imposed. The agricultural labourers now emulated the mechanics of towns, burning corn stacks and hay ricks, for which some of them were hanged. The harvest of 1821 and 1822 proved abundant; wheat fell to 43s. 3d., and the ruined farmers petitioned for agricultural relief. Government, infatuated with bullion errors, and spurning the idea that any distress could arise from the resumption of cash payments, attributed all the misery of which the farmers complained to the extraordinary productiveness of the crops. Such ignorance and impiety are scarcely credible, but the fact is not to be disputed, as the parliamentary debates in Hansard attest; nay more, the walls of parliament rang with approving cheers when the doctrine was enunciated. However, the ministerial triumph was short. Not only were the English labouring classes unable to obtain bread in the midst of this imaginary over-production, but quickly news arrived that there was a famine in Ireland. Subscriptions were raised; every pulpit, by royal command, was put into requisition to solicit alms, and the bubble of over-production burst.

prices dropped because of reduction of currency, (caused by instituting gold standard)
reduction of currency does not make it more affordable; people loose the ability to earn, so even the cheapest product becomes too expensive (no money, no funny)